Too many people buy houses and cars way beyond their means. “House poor” is a common term. But there are probably even more people who are “car poor.” Don’t be one of them! Here’s how to stay between the lines:
Stay within 10-15% of your gross pay
This includes total vehicle costs: monthly car payment, insurance, gas, maintenance, etc. On a $35,000 income, that’s about $290-$435, which means your actual car payment probably shouldn’t be more than $120-250/month. Get crazy and push it up to 20% of a $35,000 gross pay and we’re still only looking at an acceptable monthly payment of around $350 after factoring in other costs.
Don’t fudge the numbers with a longer-term loan
The longer the term of the loan, the greater the interest you’ll typically have to pay. This is for two reasons: 1) longer-term loans tend to have higher interest rates and 2) you’ll have to pay that higher interest rate for a longer period of time. Another problem with longer-term loans is you run the risk of negative equity. Since longer loans don’t pay down as quickly, often times more is owed on the vehicle than it’s worth, especially in the early years. This could put you in a really tough financial spot when it comes to trading in or selling your vehicle.
Longer-Term Loan Example
|Term||4 years||6 years|
|Total Interest Over the Term||$1,827||$3,161|